Quantitative Easing Keeps Rates Low… For Now…

09 Jul Quantitative Easing Keeps Rates Low… For Now…

With all the financial support from our government and the Federal Reserve, it is difficult to know whether improvements in our economy are legitimate or artificially produced. Many believe that the Federal Reserves’ Quantitative Easing (QE) initiative is the reason that our US stock markets have achieved record high levels in 2013, leaving investors wondering what will happen to their investments when the program ends. The same is true for the bond market andmortgagerates. It would be difficult to dispute the argument that QE has been a significant driving force tomortgagerates staying as low as they have for the past three years. This has many homeowners concerned about where interest rates may be heading in the future.

Quantitative Easing Defined

According to Wikipedia, Quantitative Easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. In this case, the Federal Reserve is buyingmortgagebonds (which directly determine the interest rate offered onmortgageloans) as well as long term US Treasury Bonds. Currently, the Federal Reserve is buying $40 billion worth ofmortgagebacked securities and $45 billion of US Treasury Bonds each month. This is driving down yields and significantly lowering interest rates.

QE Purchases and the Federal Deficit

The $1 trillion + per year required to keep QE3 in force is not currently contributing to the national debt because new money is created to support the program. With the printing press producing such massive amounts of money, the primary long term concern is inflation. As we learned in the 1970s, high levels of inflation create a significant drag on our economy and decrease the value of our currency making it difficult for those on a fixed income to afford their cost of living.

QE and the Unemployment Rate

One of the primary goals of QE3 is to reduce the unemployment rate. This reduction occurs in a couple ways:

It drives down the safe returns in the bond markets to force investors to sell bonds and purchase stocks. This has led to a sharp rise in the value of our stock market, giving those close to retirement the ability to exit the workforce and retire, thereby reducing the number of workers seeking jobs. In turn, this pushes our unemployment rate lower.

As businesses see the value of their stock rise, they are able to easily raise money to support expansion, which leads to new job creation.

Although we are not sure of the exact date when QE3 will end, most experts believe it will continue at current levels through 2013 and wind down some time in 2014. Eventually, the $85 billion per month invested in QE will end and we will be left to see how the financial markets perform without the manipulation of the Federal Reserve. Most experts expect market volatility to increase as the end nears. Most fear a significant drop in the stock market, which would help soften the blow to the bond market as investors will likely be seeking safety in the bond markets.

If you are wondering if the drop in interest rates has created an opportunity for you to save money on yourmortgageloan, visit our websitewww.dev.citycreekmortgage.comand click on the “Price your loan” tab. After answering a few questions, you will receive a customized offering of interest rates and closing costs available. Remember to look for the interest rate that offers total closing costs of $0 or below and hit “Apply Online” or call our office at 801.501.7950 for more details.